Employer’s contributions to the third pension pillar

Why should an employer start making contributions to third pension pillar contracts?

  • Good option of improving and diversifying the motivation packages of employees.
  • Good option to giving them more security about their future.
  • Making the contributions is easy and does not require any extensive developments from the employer.

The higher the employee’s income, the bigger the share of third pension pillar contributions in their salary should be in order to guarantee a sufficient income in retirement. The need also depends on whether and for how long the employee has paid money into the second pillar and how much time they have for making contributions into the third pillar.

Employers will be able to motivate their employees by making contributions to their third pension pillars from 2012 onwards.

Making contributions on behalf of employees used to be too expensive for employers (such contributions were regarded as fringe benefits that were subject to social tax and income tax),

but no income tax will be withheld on the supplementary funded pension contributions made by employers on behalf of their employees from 1 January 2012. However, social tax, unemployment insurance premium and contribution to mandatory pension fund must still be paid.

Rights of the employee as the owner of the third pillar

The new option – employer’s contributions – does not change anything in the ownership of the third pillar. As before, the acquired units will belong 100% to the employee immediately after the contribution is paid.

An employer can make contributions to an employee’s effective supplementary funded pension insurance contract or buy voluntary pension fund units for an employee’s securities account.

The employee must select a third pillar solution for themselves and then enter into a securities account contract (if they want to use funds for their third pillar savings) or a supplementary funded pension insurance contract. They must then inform the employer of their choice by giving the employer the details of the fund they selected or the payment details they received with the contract: name of the service provider, account number, reference number, and any other necessary information (e.g. the minimum payment that can be made according to the contract, etc.).

Swedbank offers various pension products via life insurance and investment funds.

Options of saving for retirement:

  1. Pension Insurance+, where the investments are managed on the basis of the contract’s lifecycle and which offers a guarantee by the expiry of the contract (capital guarantee).
  2. Private Portfolio for Pension, where the owner can choose a fund portfolio with the strategy that is the most suitable for their risk profile, which is then managed by the investment specialists of Swedbank.
  3. Three third pension pillar or V funds, where a team of experts invests pension assets in a manner that disperses them all over the world. The funds are flexible, have a transparent charge structure and different risk levels, and it is easy to move between them.

Please contact your Corporate Client Executive for an offer/additional information.

Contributions made to the third pillar that are at least 360 euros per calendar year and up to 15% of the remuneration paid to the employee (up to 6,000 euros) are not subject to income tax. The general rules of taxing salary income are applied to the part of the contributions that exceeds either of these two limits.

An employer who has made supplementary funded pension contributions on behalf of an employee must give the employee a certificate about the third pillar contributions if the employee requests it. The certificate about contributions must be issued by the 1st of December of the calendar year. The employee can then check how much of the contribution limit that is not subject to income tax was used by the employer and make additional contributions to the insurer or acquire voluntary pension fund units from the unused part before the end of the year if they wish to do so.

The employee may only subtract the part of the limit (15% of taxable income but not more than 6,000 euros) that was unused by the employer from their taxable income. The part of the contributions made by the employer is considered first when the limit that is exempt from income tax is calculated.

It is advisable for the employer to introduce a so-called new remuneration type, third pillar contribution, in its payroll systems, as it is taxed differently than any other types of payouts made to employees in the manner in which taxes are calculated. It must be possible to register the third pillar service provider as the beneficiary of such a payment and to use the necessary details on the payment order (e.g. reference number).

The rest is easy: the agreed payment is transferred to the third pillar service provider with a separate payment order.

The employer must also submit a separate report on the third pillar contributions to the employee (and the Tax Board): Form TPS (Certificate of supplementary funded pension insurance premiums paid on behalf of the employee and amounts paid for acquisition of voluntary pension fund units).